Q4 2021 RBB Bancorp Earnings Call
Yeah.
Good day, everyone and welcome to the RBC Bancorp earnings conference call for the fourth quarter and full year 'twenty 'twenty. One at this time all participants are in a listen only mode. Later, you will have an opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing the star.
And one on your Touchtone phone.
Please note this call maybe recorded and I will be standing by should you need any assistance I would now like to turn the conference over to Katherine way.
Thank you good day, everyone and thank you for joining us to discuss <unk> Bancorp's financial results for the fourth quarter of 2021 .
With me today from management are president and CEO , Alan <unk>, EVP, and Chief Financial Officer, David Morris, EVP, and Chief Credit Officer, Jeffrey Yeh, and EVP and Chief risk Officer, Ms out for Ya.
Management will provide a brief summary of the results, which can be found in the earnings press release that is available on our Investor Relations website, and then we'll open up the call to your question.
During this conference call statements made by management May include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, such forward looking statements are based upon specific assumptions that may or may not prove correct.
<unk> looking statements are also subject to known and unknown risks and uncertainties and other factors relating to <unk> bancorp's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the company for.
For a detailed discussion of these risks and uncertainties. Please refer to the documents. The company has filed with the S E C.
Any of these uncertainties materialize or any of these assumptions prove incorrect our baby bancorp's results could differ materially from its expectations as set forth in these statements.
Company assumes no obligation to update such forward looking statements unless required by law.
Now I'd like to turn the call over to Alan Ken Alan.
Thank you Katrina good.
Hey, everyone and thank you all for joining us today.
<unk> fourth quarter results contributed to a record year of growth and performance in 2021.
Expansion strategy.
<unk> proven to be an effective driver of an inch.
Loan growth.
<unk> deposit.
And most importantly shareholder value.
Our nationwide footprint gives us the ability to focus our loan and deposit origination efforts in region with high economic growth.
Our focus on serving the financial needs of.
And the bank.
First generation immigrants.
Americans gives us access to deposits and loans that have long been ignored by convention of commercial banks.
And our long history of underwriting and monitoring this different shape as it gave us the confidence that we are appropriately pricing risk and addressing issues.
Rice.
Recent expansion into the Hawaiian market and announced the acquisition of Gateway Bank in the San Francisco Bay area will provide us with additional opportunities to bring our unique model to new markets.
We now have a physical presence in six of nine target market.
To have additional expansion opportunities to discuss in the near future.
While we are pleased with our record financial results. We are also proud to have been recognized for our service to the company in which we serve and operate last year, both Simon Peng, our EVP and Chief strategy Officer, and well appointed two national companies.
<unk> to advise on community development, and we were awarded a $1 8 million CBF I grant by the U S treasuries we.
We believe these apartments and the grant.
A testament to the work we do in the communities we serve.
With that I will turn the call over to David to discuss some of the quarter's financial highlights before opening up the call for questions David.
Thank you Alan I'll start by reviewing some of the highlights of our income statement before moving onto our balance sheet net.
Net income grew two 2% from last quarter and 49% from a year earlier to a record $15 9 million or 79 cents per diluted share in the fourth quarter.
Net income benefited from several factors.
$135 9 million increase in average, earning assets and a stable yield drove a 1.6 million increase in net interest income from the prior quarter net interest income also benefited from a decline in interest expense due to a decline in average interest bearing liabilities.
Modest decline in deposit costs.
Fourth quarter noninterest income decreased by.
$2 4 million from the previous quarter, primarily due to last quarter's CDF I grant and some unrealized losses on equity investments and derivatives this quarter.
Noninterest expense decreased from last quarter as a $2 million decrease in compensation expense was offset by a $940000 increase in legal and professional expenses.
The decrease in compensation expense was due in part to an increase.
The percentage of compensation paid and restricted stock units that will vest over time.
The increase in legal and professional expense says were due in part to expenses related to the acquisition of the <unk>.
Branch in Honolulu, and the announced acquisition of Gateway Bank and the revision of the compensation plan.
Net interest margin was 343% for the fourth quarter, an increase of five basis points from the third quarter and a decrease of 24 basis points from a prior year.
Analyze and annualized return on average assets and return on tangible common equity were relatively stable in the fourth quarter at 152 and $15 nine 8% following the impact of the <unk> granted.
The third quarter.
Net loans held for investments totaled $2 9 billion as of December 31, which was a $93 million increase from last quarter.
We had good growth in all.
All our products, except C&I, which decreased by $8 million from the prior quarter in SBA, which decreased by $12 6 million.
Our non QM mortgage product, which is our most profitable mortgage product continues to lag due to the rate environment.
Our yield on average, earning assets for the quarter was stable from the last quarter at 397% and down 58 basis points from the prior year.
As with the NIM.
Year over year decrease.
Was almost entirely.
Due to lower returns on excess capital with.
With respect to funding.
Marshall customer activity drove $175 million of growth in average noninterest bearing deposits over the quarter.
And commercial activity drove an increase in deposits at December 31, which have remained elevated but could decline somewhat if rates increased.
Average cost of interest bearing deposits for the quarter was 0.47%, which was down four basis points from the prior quarter and 46 basis points from the fourth quarter of 2020.
Nonperforming assets increased by $6 5 million to $21 million in the fourth quarter, increasing 12 basis points.
Two 8% of total assets, we anticipate this increase will be temporary.
We will return to previous levels by the end of the second quarter.
As January 15 as of January 15, we had no loans and COVID-19 deferment.
The provision for credit losses of $635000 in the fourth quarter, primarily attributable to loan growth.
Our capital levels remained strong with our capital ratios well above regulatory minimums with that we're happy to take your questions.
Operator, please open up the call.
Certainly at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key once again that is star one if you would like to ask a question. We ask that you. Please pickup your handset to allow optimal sound quality.
Our first question from Nick <unk>.
Really with Piper Sandler Your line is now open.
Good day, everyone how are you.
Hi.
Hi, good afternoon.
I'd like to start with the exceptional deposit growth. This quarter. So you noted the expanding relationships with a number of your commercial clients, but can you give us some more detail on this are there any concentrations in this quarters growth that we should be aware.
Yes.
We have a couple of big clients who've come on board, we have let's just say come on board, we had one client that.
It took some money out at the end of the third quarter and it's put some money back yet and we have had growth in another quiet significant growth and another client also okay.
Yeah.
Are we talking about.
A majority of this quarter's gross coming from one or two clients I'd, just like to kind of decipher that a little bit.
I would say.
The majority of the growth is coming from a few clients.
Also he had some good growth.
Our franchisees.
Okay.
Okay.
An overarching perspective are you expecting noninterest bearing deposits to increase as a percentage of total deposits from this level.
We actually anticipate as the Covid.
Sure.
All the covet money goes away and as interest rates go up we expect $300 million to $500 million of noninterest bearing deposits to either run off the bank run out of the bank or go into highest higher instrument.
Okay.
And then related to that just to stay on the topic, you've given your cost of funds down significantly due to both rate and mix.
This significant change in the funding base changed the strategy at all.
I don't think.
We've done things so it was just that the.
The <unk>.
Interest rate and remember have been so low for this past year's debt.
We we just continue to drive.
Our interest rate.
Lower.
Ken.
I will say that one of the recent is because during the pandemic in these past two years.
What we found in Commonwealth's debt.
Could it could be a lot the policy the state they are afraid to come to the bank and a lot of the.
Renewal of the interest rate their chest.
Not that keen in our gaming on the rate a little bit so.
We see very little.
Gain on negotiation of the rates from Sydney.
Existing customer in the last two yesterday.
Right.
So low that it doesn't make sense for them to come in.
Closed the CB closer account and move to the next bank just one or two of five basis points. So I believe that helps a lot to be because in the last two years, we find that actually it's very easy for us to deal with a customer because not.
I really see people come and negotiate with us.
However, I just gave you.
As mentioned when Rick too.
That low customer may not.
He wanted to negotiate one or two of five basis points, but however.
Really depends on if this year.
Interest rates really move up four times and every time, there's 25 basis point the story could be difference. So there's still some things that we'll wait to see however, some bang in.
Communities.
Brady promoting.
Ah 68 basis points a year.
Eight basis points for one and a half years so.
Again, we are not going go into followed that's about however, some smaller bank is already trying to lock in kind of off of a higher rate.
To lock in the money.
That's very helpful. And then just my last question just on loan growth can you update us on your organic targets for 2022, just how the pipeline compares to this time last quarter.
Yes.
Again.
Our our our loan growth was still between I would say that it's still between <unk>.
<unk>.
To 10%.
Again pending on the how fast.
What would be the interest rate increase because when the interest rates because we have lots of undercover show site. So when.
When when interest rates move up.
And I see that maybe we may see may be wells in sub 10% seven 8% one of the recent his beans that when interest rates move up.
50 basis points 75 basis points that will impact the debt coverage ratio and then again because of the stress test we gone to raise our stressed.
Our interest rate on the stress test as well so.
<unk>.
Some of the loans that PSP.
<unk> because of the lower interest rate will not qualify.
In the future so.
Either we will have to.
Reduce the the loan amount or maybe.
If this is a purchase.
Damian quantify at all so.
There is still that you will be a lot of moving a lot of moving parts, but however, I believe we are still looking at.
On the consumer but this site, we will still look at 7% to 8% growth.
I appreciate all the color I'll step out thanks for taking my questions.
And we will take our next question from Andrew <unk> with Stephens, Inc. Your line is now open.
Hey, good afternoon.
Good afternoon.
Hey, I just wanted to circle back to that the noninterest bearing deposit increase we saw this quarter and just.
Just to clarify do you expect some of the increase this quarter to be transitory and potentially run off in the next couple of quarters and if so can you just quantify that amount.
Yes, we do expect that.
It is transitory.
We expect that.
We were talking about $175 million in average balances.
We expect close to half of what came on over the quarter, probably go off and then in the next six months.
Okay.
And is that incremental to the I think you referenced three to 500 million.
Non interest bearing that you expect could either.
Okay.
Okay got.
Got it.
<unk>.
Looking at the kind of mortgage gain on sale margin it looks like it ticked up a little bit this quarter.
I guess should we expect the gain on sale margin for mortgage to kind of step down a little bit from here given the.
Outlook on interest rates and then can you just provide an updated expectation.
Production or sold volume for both the QM and non QM business.
We head into 2022.
Okay. The volume for non QM business right now is zero four mortgage sales force.
Sure.
For Fannie Mae, we're still hoping that we can meet our $8 million to $10 million, Mark which will give us our gain on sale that we would need to have that we've talked about in the past.
As far as this.
What we earn on.
On our Fannie Mae loans right now.
And.
August we went to mandatory delivery and we began hedging all of our mortgages. It it's ended up being a good play for us because we have been earning about a full point more than what we are ordering prior <unk>.
Having said that right now servicing.
Part of the game is.
Right now at an all time high and as rates go up that will go down.
Okay.
So as rates go up we would expect.
Our.
<unk>.
The amount that we earn on our.
Our mortgage sales go down maybe 50 basis points it depends on how quickly and how high they go yes.
Okay.
Thank you and then.
Just on the expense base.
It's nice to see kind of on a quarter on quarter decline. This quarter, if you adjust for some of the merger.
Can you maybe help us think about I guess, the kind of full year 'twenty two gets a little bit lumpy with kind of some of the cost saves in.
At a deal expenses, but can you help us think about kind of run rate for expenses heading into the first quarter.
I think <unk>.
Fences.
Are going to be very close.
If not a little bit higher.
Our third quarter.
Sure.
Of of 2021.
It's going to probably be higher than that because.
Our salaries most of the debt.
The demand on our employees.
The demand for our employees I should say is extremely high and I think even.
Our average performers are probably getting close to 5% and our better performers are getting up to 10% 10%.
And Thats only.
Cause we cannot see that.
We need to retain our staff.
Okay. Okay.
Very helpful. Thank you for taking my questions. Congrats on a great quarter I'll step back.
Thank you.
And once again that is star one if he would like to ask a question.
We will take our next question from Kelly Motta with K VW. Your line is now open.
Hi, Thank you so much for the question most of mine have been asked and answered already.
But maybe it would be.
At that time you could.
Give us an update on the M&A environment I know you had.
The deal pending you just closed the Hawaii branch acquisition does this kind of keep you out for the next year or so or do you still have the capacity and.
Desire to continue to.
Look for acquisitions.
Uh huh.
Well.
I will say that.
Our strategy all along.
As to growth both.
Organically and through M&A so.
Our.
Our strategy.
<unk> pretty much life.
8% on loans.
11% to 12% on deposits.
The M&A side.
It depends on.
At some point at any point.
Okay.
Interest.
Becomes available so.
Uh huh.
Knowing that we are looking at a specific market.
Areas, where the financial institution.
In the first.
In first.
Generation immigrants or possible either.
And under.
The soft market so yes.
Yes.
Different.
Market sentiment, we are getting into so.
A few.
Institution, we always have eye on such as.
Area light.
Seattle such Allen.
Hi.
Yeah.
Texas and some.
Some of the Metro project in Sealy.
Phoenix.
Atlanta.
Those are still the targets that we're looking at so again.
Really whether we can pick up a particular institution.
To see whether we have any of this institution that we are looking at become available.
Kelly.
Okay.
Okay that answers my question. Thank you. Thank you so much okay.
And we have a follow up question from Andrew <unk> with Stephens, Inc. Your line is now open.
Hey, Thanks for taking the follow up I did want to ask one quick one just on the buyback I saw you purchased some shares I think 75000 shares back during.
During the quarter, obviously, we've seen an improvement in price from from there and you've got a pending acquisition now just wanted to get kind of updated thoughts on appetite now as it pertains to the buyback moving forward. Thanks.
Okay right now we are over our.
I guess target price for the buyback so.
That will probably won't be any buyback for the.
As long as we are still at a 29 price.
We are right now.
There won't be.
But if the price crisis does go back down it's already preset so it will.
Will kick in.
At that level okay.
We still have 333000 shares I believe close to that.
So that we can do and our problem.
As the volume.
Those days when we're buying when we are in the market we're buying.
Less than a 1000 shares.
Okay.
Understood. Thank you for taking my question sure. Thank you.
And we have no further questions on the line at this time I will turn the program back over to our presenters for any additional or closing remarks.
Once again thank.
Thank you all for joining US today, we look forward to speaking to many of you in the coming days and weeks have a nice day.
Okay.
This does conclude today's program. Thank you for your participation you may disconnect at this time and have a wonderful day.
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